GM Aims to Lower Labor Costs With Buyouts, Cheaper Hires

General Motors Co. (GM) employees inspect a Chevrolet Silverado truck as it moves down the production line in Flint, Michigan. Photographer: Jeffrey Sauger/Bloomberg

Sept. 21 (Bloomberg) -- General Motors Co. will move to
entice electricians and its other highest-paid U.S. hourly
workers to retire so it can hire lower-wage replacements through
a four-year labor agreement with the United Auto Workers.

GM, the biggest U.S. automaker, will offer buyout packages
worth as much as $75,000 to its roughly 10,000 skilled-trades
workers, the Detroit-based UAW said yesterday in a briefing with
reporters. Other employees eligible to retire can take $10,000
to stop working within two years so that GM can replace them
with new hires starting with wages of less than $16 an hour.

UAW President Bob King said the agreement achieves some of
the union’s major goals in talks with the Detroit-based
automaker, which emerged from U.S.-backed bankruptcy in 2009.
The accord up for a ratification vote by 48,500 members calls
for GM to invest $2.5 billion through four years, reopen a plant
in Tennessee and add or retain jobs at six other factories.

“It’s all about demographics and attrition for GM now,”
said Brian Johnson, a Chicago-based analyst for Barclays
Capital, who has an “overweight” rating on GM. The agreement
allows GM to replace more expensive workers with an unlimited
number of employees at the entry-level wages, which is “a plus
that people weren’t expecting,” he said.

GM will save $30 an hour for every skilled-trade employee
who leaves and is replaced by a lower-paid worker, said Kristin
Dziczek, director of the labor and industry group at the Center
for Automotive Research in Ann Arbor, Michigan. That adds up to
$57,000 a year per worker who is replaced, she said.

Buyout Eligibility

About 4,000 skilled-trades employees and 11,550 production
workers are eligible to retire, according to GM.

Attrition of those employees would make room for entry-level workers whose starting pay will increase to at least
$14.78 an hour from $14 as part of the UAW’s agreement with GM.
The wage rises to as much $19.28 an hour by 2015 from a previous
maximum of $16.23.

GM may find it difficult to get workers to leave in the
next year, said Arthur Schwartz, a former GM labor negotiator.
The $10,000 buyout is available for two years to production
workers. Those same employees will be eligible for several
payouts in that span, including profit sharing, annual $1,000
checks to protect against inflation and bonuses tied to quality.

“Why wouldn’t they wait another two years?” said
Schwartz, president of Ann Arbor, Michigan-based consulting firm
Labor & Economics Associates. “There is a lot of money that
will be paid over that time period, and the $10,000 isn’t going
away.”

Entry Workers

There’s no limit to the number of workers who can be hired
at entry-level wages, said Joe Ashton, the union’s vice
president for GM relations. In 2015, the second tier would be
capped at 25 percent, according to King.

“We would love to see it at 40 percent because that would
mean our workforce would have grown,” Ashton said of GM’s
portion of workers earning lower wages. About 4 percent of GM-UAW workers are receiving that pay now, he said.

GM is offering $10,000 buyouts to all employees who retire
within two years, the UAW said yesterday, and the automaker will
offer additional $65,000 bonuses to skilled-trades workers who
leave between Nov. 1 and March 31.

GM’s accord also calls for the company to provide a record
$5,000 lump-sum signing bonuses. The largest U.S. automaker will
invest $419 million to reopen the assembly plant in Spring Hill,
Tennessee, which will make two midsize cars and hire 1,710
people. The agreement adds or retains 6,400 jobs, the UAW said.

Plant Investments

GM will add a shift at a full-size van factory in
Wentzville, Missouri, to make midsize pickups, such as the
Chevrolet Colorado and GMC Canyon and boost output in Michigan
at two powertrain plants and a casting factory, the union said.
GM also committed $230 million to continue assembling trucks in
Fort Wayne, Indiana, where workers make Chevrolet Silverado and
GMC Sierra pickups.

A midsize truck plant in Shreveport, Louisiana, will close.
The union is still pushing GM to extend the use of the factory
and consider adding stamping work there, Ashton said. A plant in
Janesville, Wisconsin, will remain on standby, the UAW said.

Employees who were moved from a shuttered factory get
return-home rights and will receive up to $30,000 relocation
payments, the UAW said.

Chief Executive Officer Dan Akerson said when talks began
in July that the automaker wanted to manage costs while giving
UAW-represented workers the “opportunity to share in the
success of the company going forward.” GM reported $6.36
billion of profit in the first half and $6.17 billion last year.

‘Less Risky’

“This is, of course, a less risky contract,” Sean
McAlinden, chief economist at the Center for Automotive
Research, said yesterday in an e-mail. “If the market heads
south, so does labor compensation.”

GM pledged to base its profit-sharing arrangement on a
greater portion of the automaker’s income, the UAW said. Annual
profit-sharing checks will be determined by GM earnings in North
America instead of just the U.S. The plan equates to bonuses of
about $1,000 per $1 billion in North American profit.

The agreement requires a minimum profit in North America of
$1.25 billion to produce a payout and caps distributions to
workers at $12,000, the UAW said.

“This contract really shows the auto industry is back,”
King said yesterday.

GM expects the union to hold ratification votes within 10
days, according to a Sept. 17 statement.

More Payments

Union workers will get $1,000 “inflation protection”
payments for the next three years. If they meet quality targets,
they will be paid an additional $250 a year.

The UAW continues to negotiate with GM over a plan to
divert 10 percent of workers’ profit-sharing payments to the
union’s retiree health-care fund, Ashton said. The additional
funds are intended to improve coverage for retirees. GM has
questioned the legality of the diversion, Ashton said.

“There are some legal questions about that,” Ashton said.
“We’re still negotiating with GM on that.”

GM fell $1.15, or 5.1 percent, to $21.28 at 4 p.m. in New
York Stock Exchange composite trading. The shares have plunged
42 percent this year and are at the lowest since GM’s initial
public offering in November.

The tentative agreement will be put to a vote by UAW
members who King has estimated each gave $7,000 to $30,000 in
concessions since 2005. Analysts Himanshu Patel of JPMorgan
Chase & Co. and Johnson of Barclays said ratification was likely
in separate research notes published Sept. 19.

Economic Gains

“The economic gains for the membership are good,” Art
Reyes, president of UAW Local 651 in Flint, Michigan, said in an
interview. “I’ll recommend it to the membership.”

Contracts covering 113,000 workers at GM, Ford Motor Co.
and Chrysler Group LLC were set to expire Sept. 14 before being
extended. Fiat SpA-controlled Chrysler is pushing for a smaller
signing bonus than GM accepted, about $3,500, two people
familiar with the talks said Sept. 19.

The UAW typically uses its first accord to set a pattern
for pay and benefits at the other two organized U.S. automakers.
Union negotiators will seek a deal with Auburn Hills, Michigan-based Chrysler next and then go to Dearborn, Michigan-based
Ford, three people familiar with the talks have said.

“There is a general framework pattern we’ll go to Ford and
Chrysler with,” King said yesterday. “I’m confident we can put
an agreement together for both.”

No-strike Pledge

UAW members agreed to a no-strike pledge at GM and Chrysler
as part of their 2009 bankruptcies. Unsettled disputes are to be
decided through binding arbitration.

Ford didn’t receive a U.S. bailout and UAW members there,
going against the wishes of union leaders, rejected a strike ban
and arbitration.

King, 65, has pledged to organize a foreign automaker this
year to expand the UAW’s bargaining power beyond GM, Ford and
Chrysler. The agreement with GM will help that effort, he said.

“Winning always helps you get momentum,” King said.
“When workers see how we play such a key role in the success of
the companies, that will have a big impact.”